Case Study: Airasia’s Strategic Management

AirAsia was launched in 2002 by Tony Fernandes, at the time a pioneer of low-cost flights in Asia. At first, the company operated three Boeing 737s. In 2004, after a very successful public offering, AirAsia was listed on the Malaysian Stock Exchange and from there grew rapidly. As of 2011, the AirAsia Group has 93 aircraft spread across 12 hubs (see appendix 1) and is flying to more than 60 destinations in 16 countries with 130 domestic and international routes.
AirAsia operates 3,500 flights every week on domestic and international routes from nine regional hubs in Malaysia, Thailand (Thai AirAsia), and Indonesia (Indonesia AirAsia). AirAsia’s head office and its main base is the Low-Cost Carrier Terminal at Kuala Lumpur International Airport. This terminal handles 48. 4% of AirAsia’s traffic (see appendix 2). AirAsia is the leading low-cost carrier in the world and won the Skytrax award for World’s Best Low-Cost Airline in 2009 and 2010.
In addition, the company is Asia’s largest low-fare, no-frills airline and has a long-haul arm, AirAsia X, which currently flies to China, India, Iran, Taiwan, the UK, and Australia with plans to launch services to Japan and South Korea. This report will use the PESTEL framework to evaluate the opportunities and threats presented by AirAsia’s external environment. It will then apply a SWOT framework to analyze the Strengths, Weaknesses, Opportunities, and Threats of the AirAsia group.

Finally, this report will list three recommendations, to be evaluated by the AirAsia board of directors before implementation. To begin, a PESTEL framework will enable us to understand all the macro-environmental factors affecting AirAsia.
1. Political Opportunities
Deregulation and privatization present Air Asia with opportunities for new routes. For example, the ASEAN governments signed the ASEAN Multilateral Agreement on the Full Liberalisation of Passenger Air Services (an open skies policy) in 2010.
From 2015, designated airlines from ASEAN countries will be able to fly to any city with an international airport in a member nation. AirAsia will therefore have the opportunity to penetrate undeveloped markets in the ASEAN region by opening new routes. However, it should be noted that foreign competitors will have the same opportunity and new routes will require the utilization of more aircraft. The Malaysian Government has always supported the Malaysian airline industry. One example of this is the opening of the Low-Cost Carrier Terminal at Kuala Lumpur International Airport.
Further, the Malaysian Government has helped all low-cost carriers (LCCs), and in particular, AirAsia, to develop a competitive edge by reducing their operating costs and improving their logistics. Secondly, the Malaysian Government has given AirAsia, along with all Malaysian airlines, significant tax incentives (see appendix 3). These tax-incentives in fact helped AirAsia to cover a substantial part of its loan interest when purchasing aircraft. It is also important to highlight that other Southeast Asian countries are often substantially state-owned.
This allows the government to control the airline and protect it from the competition. As an example, AirAsia established a joint venture with Shin Corp when it began operating in Thailand with Thai AirAsia. AirAsia had a holding of 49% of Thai AirAsia while the remainder was held by Shin Corp., owned by the former Thailand Prime Minister Thaksin Shinawatra (2001 -2006). Threats AirAsia and its competitors can also be negatively affected by government decisions. For example, unless the Malaysian government makes an effort to minimize crime, travelers may choose to visit other destinations.
Low-cost carriers are also suffering from recent delays in the construction of a new permanent low-cost carrier terminal (Expected to open in October 2012), work being undertaken by the Malaysian government. These delays reduce the ability for low-cost carriers to expand their capacity by catering to new passengers. Barriers to trade between countries may also inhibit low-cost carriers in Malaysia from entering more protected markets like China where the government tightly controls the airline industry.
Civil conflicts and conflicts between regional governments can also affect AirAsia’s operations. For instance, there has been a resurgence of violence in Southern Thailand and terrorist attacks have occurred in the rest of Thailand and Indonesia. Additionally, Malaysia’s recent decision to explore oil-rich waters off the coast of Borneo has led to increased tensions with Indonesia. These tensions could harm customer confidence and affect all businesses operating in Southeast Asia.
2. Economic Opportunities
The economic situation in Malaysia is stable. As an illustration, from 2004 to 2010, Malaysia’s average interest rate was 2. 91%, its average inflation rate was 2. 77% and its average unemployment rate was 3. 43%. In addition, the Government of Malaysia has a current account surplus that enables them to continuously boost domestic demand, resulting in average annual GDP growth of 4. 5% between 2000 and 2011. The global forecast for all Asian countries for 2011 anticipates average GDP growth of at least 3% for 2011.
Countries like China, India, and Indonesia are expected to experience GDP growth exceeding 6% (see Appendix 4). Although, economic downturns are always complicated for any business to negotiate, they can also present certain opportunities for companies like AirAsia because, for example, aircraft leasing costs are often reduced by about 40% at such times. Thus, companies with ‘deep pockets’ are able to invest and expand their fleet at a very competitive price. Threats Fluctuating oil prices are a major challenge for airlines.
For example, in 2009 and 2010 the price of jet kerosene price represented between 40 to 55% of AirAsia CASK (cost per available seat kilometer). From the latest information, the fuel price in 1Q11 was US$117 per barrel, relatively high when compared with 1Q10 when the price was only US$99. 6 per barrel. Fluctuating oil prices have a major impact on operational costs. This is why all airlines use fuel-hedging contracts to stabilize the price they pay for the purchase of jet kerosene. By hedging fuel, Air Asia paid an average price of US$107 per barrel in Q1 2011 from (see Appendix 5).
The last decade was very prosperous for several Southeast Asian airlines and the Asia Pacific domestic LCC penetration by capacity has expanded rapidly and has reached a saturation level in several countries. For instance, in countries like the Philippines (61. 8%) or Malaysia (56. 5%), more than half of the region’s airline seats are supplied by low-cost carriers compared with the world average of 24% (see Appendix 9).
3. Social/Cultural / Demographic Opportunities
Firstly, Southeast Asia offers an important advantage to airlines because the region is comprised of multiple ethnic groups that are able to speak several languages. For example, Malaysia is composed of several ethnic groups – Malay, Chinese, Indian, and Thai – and this provides a company like AirAsia with the ability to find staff that can speak several languages, something which is useful as they rapidly expand their business outside Malaysia. Secondly, the rapid urbanization of Southeast Asia clearly helps airlines because it forces governments to develop important infrastructures and open new airports in order to facilitate the flux of people between countries.
According to the UN, seven out of the 15 most populated cities in the world (;10 million) are predicted to be in Asia by 2025 (see Appendix 6). Thirdly, rapid economic growth also drives rapid growth in the middle class within Asia’s large population. According to the latest OECD forecast, the amount of money spent by the Asian middle class is expected to represent 59% of the total amount spent by the middle class in the world by 2030 (see Appendix 7).
By analyzing average household consumption within Asia, we can also confirm that the communication and transport spending category will increase from less than 10% in 1995 to 15% in 2015 and this will definitely increase the demand for air travel between Asian countries (see Appendix 7). Threats The emergent middle class is growing more rapidly in countries like India and China. It is likely that these countries will develop foreign LCC competitors that will have a higher growth rate as well as a larger economy of scale than Malaysian airlines like AirAsia.
4. Technological Opportunities
By utilizing information technology, airlines have been able to reduce their operating costs. LCCs were clearly the most effective players in the airline industry at implementing breakthrough information technologies. By implementing e-ticketing systems and using e-commerce to bypass traditional travel agents, LCCs have been able to ‘lean’ their processes by removing unnecessary costs. Furthermore, new, state-of-the-art aircraft are more fuel-efficient than older models, and this has helped airlines to reduce their fuel consumption.
AirAsia has implemented these technologies and they have contributed to their operational efficiency. Today, AirAsia has the world’s lowest CASK (cost per available seat kilometer), at just US$3. 52 in 2010 (see Appendix 8). It has achieved this by implementing the following best practices: a powerful Yield Management as well as Computer Reservation System (Novitiate Open Skies), a global Enterprise Resource Planning System (powered by Microsoft Business Solutions), and a Customer Relationship Management system provided by Siebel.
Threats By being highly dependent on technology, LCCs incur costs in ensuring that their systems operate smoothly and safely (i. e. from backup systems and maintenance). In addition, by relying heavily on online sales, LCCs expose themselves to large financial losses when system disruption occurs.
5. Environmental/Legal Opportunities
Firstly, AirAsia has the youngest fleet in Asia, with the new Airbus A320 and A330 providing improved fuel efficiency.
This is fortunate because the EU has adopted a new policy (coming into effect January 1, 2012) that requires all airlines to pay for greenhouse gas emissions released on journeys to and from EU airports. Secondly, labor unions in Asia are relatively weak when compared with the EU or the USA and this helps airlines in Asia to remain competitive by reducing their overhead cost to a minimum. Threats Natural disasters force airlines as well as airports to reduce or shut down their operations for hours or even days.
In the last decade, airlines have been exposed to Hurricanes, snow, fog, H1N1 influenza pandemic, volcanic eruptions, and earthquakes.
SWOT

Opportunities
Threats

O1) The population of the Asian middle class is booming and will reach almost 700 million by 2012 O2) Lots of potentials to expand and exploit growing markets in China, India, Japan, and Korea as well as the long haul approach in Europe (AirAsia X) O3) Higher fuel costs may force some competitors out of the industry
T1) ASEAN Open Skies will increase competition, for example, Singapore Airline and Thai Airways will start LCCs in 2012 T2) Saturation of the LCC market in the Philippines and Malaysia T3) Aviation regulation and Government interference will impact AirAsia’s passenger capacity (recent delays in the construction of the new, permanent low-cost carrier terminal (Expected opening date October 2012) T4) Accidents and disasters affecting customers

Strengths
Weaknesses

S1) Cost leadership: The world’s lowest CASK (Cost per available seat kilometer) with $US3. 52 in 2010. S2) Economies of scale: The biggest and youngest fleet among the LCCs in the region, with an average age of 2. 5 years. S3) Single aircraft fleet (which reduces maintenance and training costs) S4) Double-digit growth of all AirAsia subsidiaries; AirAsia achieved record profit in Q42010 S5) Quick turnaround of 25 minutes, which is the fastest in the region S6) AirAsiaX has the world best fleet-utilization, in excess of 17 hours, achieved by focusing on price-sensitive, time-insensitive customers S7) Profit margin is the highest margin in the LCC industry with 23%; by way of comparison, Ryanair’s profit margin is 20% S8) The highest ancillary revenue in the LCC industry (through services like picking a seat, cancellation, baggage supersizing, excess baggage, cargo, as well as travel and tours through AirAsiaGo. com, e-coupon with AirAsia Megastore or Hotels with TuneHotels. om) S9) Brand name is well established in Asia Pacific S10) Good at using IT to deliver low-cost operations (ticketless travel, online booking, online check-in) S11) Strong management team consist of industry experts with fast decision-making processes (entrepreneurial) S12) Not sensitive to seasonal factors due to the high diversification of routes S13) Partnership ANA S14) Virgin Group has 20% share in AirAsia X S15) Weak labor unions
W1) AirAsia load factor fluctuates a lot and is not optimal. W2) Limited human resources due to low costs W3) Non-central location of secondary airports W4) Heavy reliance on outsourcing (maintenance, repair). W5) Not financially strong enough to compete with “deep pocket” international airlines, e. g. Singapore Airline’s new LCC

*
Main Recommendations

*
O3 with W1 = Recommendation 1 (CI to benchmark European LCC Load factors)O2, S13, S14 with T2 = Recommendation 2 (Partnership to enter new countries due to high LCC penetration level in Southeast Asia)S4 with T1 and W5 = Recommendation 3 (IPO of Thai and Indonesian AirAsia as well as AirAsia X to finance future growth)

Recommendations
1) Load factor As can be seen from the SWOT analysis, AirAsia is outperforming its competitors in terms of operation in several fields. It has the world’s lowest CASK, the world’s highest ancillary revenues per passenger, and is the largest discount carrier in South East Asia.
However, by analyzing the cost structure of Air Asia, it is clear that revenue can be improved by increasing the passenger load factor from 75% to more than 85%, something Easyjet has been able to do (see Appendix 10 for more information). The CI team must be deployed to investigate in detail the strategy that Easyjet has used.
2) LCC penetration in Southeast Asia is reaching the maturity level need for diversification Appendix 9 and the SWOT together highlight the fact that domestic LCC penetration by capacity (seats) within Southeast Asia is starting to reach its maturity by exceeding LCC penetration worldwide (30% of Southeast Asian flights are supplied by LCCs compared with 24% in the world).
Countries like the Philippines and Malaysia are clearly the most mature, with more than 50% of airline seats supplied by low-cost carriers. By analyzing LCC penetration per country, we can see that AirAsia can leverage its AirAsia subsidiaries(Thai AirAsia and Indonesia AirAsia) to enter new countries with very low LCC penetration rate, such as Taiwan, Indonesia, China, and Japan. The recent partnership of AirAsia with the Japanese airline ANA underlines the possibilities of this strategy. LCC penetration within Japan is only 9. 1%, far more than China with 6%, Indonesia with 5. 2%, or the empty market in Taiwan with 0%. Meanwhile, Air Asia X (in which Virgin Group has an ownership position along with Air Canada) could be used to enter the difficult market in China more deeply.
CI teams (AirAsia, Virgin Group, Air Canada) should be able to share information and knowledge in order to define several scenarios for future collaboration within China.
3) IPO to finance growth The construction of the new, world-class low-cost carrier terminal in Kuala Lumpur is expected to be completed in October 2012. Once built, it will be able to serve over 30 million passengers a year and, with expansions, will have the capacity to serve up to 45 million passengers a year. By analyzing the forecasted growth of AirAsia as well as its cost structure (see Appendix 11) we can see than the current economic downturn has increased the cost of aircraft by 212%, mainly due to the credit crunch.
In addition, AirAsia’s ability to finance the expected growth forecasted is limited because its current structure includes only one publicly listed company that is used to finance all the capital expenditures for Thai AirAsia, Indonesia AirAsia, and AirAsia X. One solution to cope with this situation of high growth and important capital requirements are to launch IPOs in 2011, especially because AirAsia X and Thai AirAsia are performing very well in 2011. The proceeds of IPOs could enable AirAsia to buy new planes and fund growth in order to compete with Singapore Airlines and Thai Airways who will start their own LCCs in 2011. In order to optimize the IPO, the CI team will evaluate the best time for implementing this strategy.
In, addition, the CI team will also evaluate the possible risks that IPO will have on the autonomy of AirAsia.
Appendixes:

Appendix 1 AirAsia Group fleet composition: Q1-2011 Source: http://www. airasia. com/iwov-resources/my/common/pdf/AirAsia/IR/AA_1Q11_Analyst_Presentation. pdf
Appendix 2 AirAsia’s extensive domestic and regional network Source: http://www. airasia. com Source: http://www. centreforaviation. com/profiles/airlines/airasia-ak
Appendix 3 Malaysian government Tax Incentive Source: http://www. centreforaviation. com/profiles/airlines/airasia-ak
Appendix 4 Asian countries GDP Forecasts
Appendix 5 Jet Kerosene prices Source: Centre for Asia Pacific Aviation & US Energy Information Administration
Appendix 6 Top 15 most populated cities in the world (>10 million) are predicted to be in Asia by 2025
Appendix 7 Emerging middle class in Asia Source: http://www. oecd. org Source: http://www. adb. org
Appendix 8 AirAsia has the world’s lowest CASK (Cost per available seat kilometer) with 3. 52 USD in 2010. Selected airlines RASK and CASK: Three months ended 30-Jun-2010 (RASK = Revenue per available seat kilometer and CASK = Cost per available seat kilometer)

Airline
RASK
CASK

AirAsia
USD 4. 87
USD 3. 52

Air Arabia**
USD 4. 88
USD 4. 43

Tiger Airways
USD 4. 61
USD 4. 58

JetBlue
USD 6. 72
USD 6. 04

COPA
USD 7. 37
USD 6. 58

Norwegian Air Shuttle
USD 7. 34
USD 6. 82

Southwest
USD 7. 73
USD 6. 84

Vueling
USD 7. 68
USD 6. 91

China Southern Airlines**
USD 7. 32
USD 6. 98

Thai Airways
USD 6. 76
USD 7. 15

WestJet
USD 7. 95
USD 7. 43

Continental Airlines
USD 8. 25
USD 7. 52

Virgin Blue**
USD 7. 43
USD 7. 52

GOL
USD 7. 99
USD 7. 71

Air New Zealand**
USD 9. 22
USD 7. 71

Delta
USD 8. 65
USD 7. 74

US Airways
USD 8. 93
USD 7. 88

United Airlines
USD 8. 82
USD 8. 08

Air Berlin
USD 7. 76
USD 8. 12

Jet Airways
USD 8. 09
USD 8. 20

American Airlines
USD 8. 51
USD 8. 22

Cathay Pacific
USD 9. 55
USD 8. 41

TAM
USD 8. 54
USD 8. 44

China Airlines**
USD 10. 60
USD 8. 49

Air China**
USD 9. 75
USD 8. 60

China Eastern Airlines**
USD 9. 25
USD 8. 63

Malaysia Airlines
USD 7. 90
USD 8. 75

Singapore Airlines
USD 9. 61
USD 8. 92

LAN
USD 10. 31
USD 9. 18

British Airways
USD 8. 88
USD 9. 21

EVA Air**
USD 10. 47
USD 9. 38

Qantas**
USD 9. 84
USD 9. 68

Iberia
USD 9. 78
USD 9. 75

Korean Airlines
USD 12. 65
USD 9. 82

Finnair
USD 10. 20
USD 10. 68

Asiana
USD 12. 48
USD 10. 69

Air France
USD 12. 05
USD 12. 51

SAS
USD 15. 03
USD 14. 18

Lufthansa**
USD 16. 41
USD 16. 49

easyJet
USD 6. 99
n/a

Source: Centre for Asia Pacific Aviation and company reports
Appendix 9 Asia Pacific domestic LCC penetration by capacity 2011: Source: Centre for Asia Pacific Aviation & OAG Facts
Appendix 10 Passenger load factor Easyjet, Ryanair vs AirAsia Selected European airlines intra-Europe passenger load factor and passenger load factor growth: Mar-2011 AirAsia load factor development: 2Q2008 to 2Q2010. Source: Centre for Asia Pacific Aviation and AirAsia AirAsia cost structure. Source: Centre for Asia Pacific Aviation & AirAsia
Appendix 11 AirAsia A320 and A320neo aircraft delivery schedule: 2011 to 2026. Source: Centre for Asia Pacific Aviation and Ascend AirAsia cost breakdown / ASK: 1Q08 vs 1Q09. Source: Centre for Asia Pacific Aviation & Airasia

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